Global Economic Crisis

In its editorial of April 14, 2020, which The New York Times entitled “The Global Coronavirus Crisis Is Poised to Get Much, Much Worse,” it was pointed out that while Covid-19 is currently ravaging primarily the wealthier nations of the northern hemisphere, it will soon strike the impoverished nations of the Third World.

In its editorial, The New York Times states the following:

What probably lies ahead is the spread of the coronavirus through countries ravaged by conflict, through packed refugee camps  and detention centers in places like Syria or Bangladesh, through teeming cities like Mumbai, Rio de Janeiro or Monrovia, where social distancing is impossible and government is not trusted, through countries without the fiscal capacity or health services to mount a viable response.

That would be disastrous not only for them but also for the rest of the world as supplies of raw materials are disrupted, fragile economies collapse, strongmen grow stronger and the virus doubles back to reinfect northern regions.

This is a nightmare scenario, but one not only plausible, but actually highly probable. The form of the human misery that will afflict poorer nations in this next phase of the Covid-19 pandemic will worsen the global economic crisis that has been unleashed by the coronavirus.

Should the pandemic lead to a collapse of medical systems and economies throughout the Third World, a likely result will be an unprecedented wave of Covid-19 refugees seeking perceived safer havens of developed economies, which themselves will be ill-prepared for the consequences of such radical population movements. This will further exacerbate-and lengthen- the extent and severity of what is both a massive global health crisis and increasingly a devastating global economic tsunami.

The U.S. Labor Department just released its weekly number of jobless claims, and in a mocking twist of painful irony, the figures were an exact match for the previous week: 6.6. million additional jobless applications. This means that over the past three weeks, 16 million Americans have filed unemployment claims, adding another 10 percent to the unemployment rate in the United States, which now stands at just under 14%.

Never in history, not even during the Great Depression of the 1930s, has there been such a rapid rise in unemployment. The collapse of the job market in the U.S. has been replicated in virtually every advanced economy. This means that the health crisis created by policy responses to the coronavirus pandemic has now unleashed a destructive global economic crisis of unparalleled dimensions. And this is only the beginning. In the weeks ahead, the economic news will only get worse.

Such a swift collapse in employment numbers mean two simultaneous tsunamis of economic doom have been unleashed: an unprecedented rate of demand destruction, combined with an implosion in governmental revenues across the globe. The latter trend, at a time of increasingly vast deficit spending by sovereigns, will in due course unleash another wave of economic calamity; a sovereign debt crisis.

Never before in human history has a public health crisis created in its wake such economic calamity, resulting in the Global Economic Crisis of 2020.

In a chilling yet cogently delivered live Twitter lecture on likely economic trends stemming from the Covid-19 pandemic, NYU professor and economist Nouriel Roubini gave a harsh yet realistic overview on the unfolding crisis. Professor Roubini was one of the few economists to predict the global financial crisis that occurred more than a decade ago.

The views Roubini relayed in his Twitter presentation can be summed up as follows:

1. The health policy response will determine whether or not the world faces a severe recession or a greater depression. A global recession worse than the 2007-09 global financial crisis is already baked into the cake. However, perusing a mitigation strategy to contain the coronavirus pandemic will ensure the global economy heads into a severe depression. Only a suppression strategy as implemented by China initially and now Italy can prevent the worst economic damage. Though a suppression strategy that shuts down the economy for 2 or 3 months is very painful, a mitigation strategy will ensure that Covid-19 spreads like wildfire, leading to a temporary reopening of the economy followed by further and deeper shutdowns. Roubini urges policymakers to adapt draconian suppression measures as the only alternative to far more calamitous economic collapse.
2. The right policy responses will be crucial to preventing a greater depression. The current wave of unprecedented monetary and fiscal measures, adapted in a very short timeframe, are correct. In particular , very large fiscal deficits equivalent to ten percent of GDP, which in turn are fully monetized by the central banks, are necessary in the short-term. However, such extraordinary measures are unsustainable in the long-term, and will lead to stagflation.
3. The health emergency crippling the global economy is not the only shock confronting it. Roubini identified a geopolitical depression exacerbated by revisionist powers (China, Russia, Iran and North Korea) seeking to further destabilize the United States through cyber warfare. In particular, the emerging cold war between China and the U.S. is leading to decoupling of supply chains and de-globalization, which will increase costs of production and hence inflation.
4. Professor Roubini sees a great risk that Iran’s regime will initiate a full-scale war with the United States as the only means of preserving itself from being overthrown, if Trump is reelected and the economic sanctions lead to its collapse. Such conflict will close the straits of Hormuz, leading to a massive spike in oil prices.

In summary, a sobering and harshly realistic analysis of the global economic crisis now underway.

Perhaps the most insightful economist to watch as the Global Economic Crisis unleashed by the Covid-19 pandemic rages is Nouriel Roubini, economics professor at New York University. In the months leading up to the 2008 global financial crisis , his predictions were eerily accurate. Now he has published an essay on what is unfolding regarding the Coronavirus pandemic induced economic disaster on the Project Syndicate website, entitled ominously “A Greater Depression?”

I urge ever sensible person to read it; the link is: https://www.project-syndicate.org/commentary/coronavirus-greater-great-depression-by-nouriel-roubini-2020-03?

Among the points Professor Roubini makes is that the collapse in stock markets has greatly exceed in velocity not only what occurred during the global financial crisis of 2008, but also during the Great Depression during the 1930s. While other prognosticators are predicting a U or L or worst case V trajectory and recovery, Roubini views such happy talk as delusional. He sees every indicator as pointing to a global economy in unrestrained free fall. The hope for an eventual recovery lies in a host of unconventional monetary and fiscal measures. However, as he observes, there are a host of probable white swan events and negative political realities that will likely obstruct the unprecedented policymaking the now full-fledged Global Economic Crisis requires.

The secretary general of the Organization for Economic Cooperation and Development (OECD), Angel Gurria, has warned that the global recession unleashed by the coronavirus pandemic will take years to recover from. He stated that the shock to the global economy created by the Covid-19 outbreak had already exceeded the damage created by the 2008 global financial crisis.

The head of the OECD told the BBC that claims by some political leaders that the world will quickly bounce back from the Global Economic Crisis now underway was “wishful thinking.”

There is growing consensus that the world is heading into a full-blown economic depression.

The coronavirus pandemic is not only a public health emergency of massive proportions; the response by governments worldwide has created staggering economic contraction, leading to unprecedented growth in unemployment. Initial data indicates that countries that previously had low single digit unemployment rates are now, within a period of a few weeks, seeing double-digit unemployment statistics, with no end in sight to further hemorrhaging of jobs.

Policymakers have concluded that sever measures are necessary to contain the coronavirus pandemic; shutting down all but the most essential industries , stay-at-home directives and social distancing. This has all led to unprecedented demand destruction, resulting in massive growth in the ranks of the jobless.

The world is increasingly stuck between a rock and hard place. The Covid-19 outbreak is proving so virulent, the absence of desperate measures enacted by policymakers will result in overwhelming and collapsing the public health system, resulting in massive death. What is occurring in Italy reflects this.

On the other hand, demand destruction on the scale we are witnessing will exacerbate the Global Economic Crisis now unfolding, rivaling the Great Depression in its intensity. This will implode tax revenues, ironically also leading to underfunding and ultimately collapsing public health institutions. The short-term fiscal response by governments will undoubtedly bring on the largest public debt crisis in economic history. In other words, the sovereign cannot indefinitely write checks to the hordes of unemployed , whose number will grow along with the victims of the pandemic.

There is a real possibility of mass death due to the impact of covid-19. It also must be recognized that long-term double-digit unemployment risks undermining social and political order, also leading to mass death through social disorder and massive violence by an increasingly desperate population.